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5 Essential Tax Tips for Small Business Owners

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Tax season can be overwhelming for business owners, but with the right knowledge and preparation, it doesn’t have to be overwhelming. Understanding the tax laws and implementing effective strategies can help you save money and avoid potential headaches in the long run. 

January 5, 2024
Author: NCH

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Whether you’re a budding entrepreneur or a seasoned business owner, these tax tips will empower you to navigate tax season and keep your business on the path to prosperity.

How to Manage Your Taxes As a Small Business Owner

Organize and Maintain Accurate Records

When it comes to tax season, good record-keeping practices are the foundation of a successful and stress-free experience for small business owners. It not only ensures compliance with tax regulations but also provides a clear view of your business’s financial health. Proper record-keeping enables you to identify potential deductions, substantiate expenses, and demonstrate the legitimacy of your business transactions to the tax authorities.

With your financial records well-organized, you can easily track income and expenses, making it simpler to complete tax forms and file returns promptly. Moreover, in the event of an audit, having comprehensive records will be your strongest defense, as you can readily provide evidence of your business activities and financial transactions.

As a small business owner, you need to maintain the following records: 

  • Income Records
  • Expense Records
  • Bank Statements
  • Tax Forms and Returns
  • Employee Records
  • Contracts and Agreements

The retention periods for these records can vary, but retaining them for at least 3-7 years is recommended. Some records, such as tax returns, may need to be kept indefinitely.

Cloud-based accounting software like QuickBooks and Xero offers features like automated transaction tracking, expense categorization, and real-time financial reporting. These tools save time and reduce the risk of manual errors. They also often provide secure data storage, ensuring your financial records are backed up and protected against data loss. 

Understand Deductible Expenses

Deductible expenses are ordinary and necessary expenses incurred in the ordinary course of your business operations. The key is to ensure that these expenses are directly related to your business and are not of a personal nature.

Common deductible business expenses include:

  • Office Supplies
  • Rent and Utilities
  • Employee Salaries and Benefits
  • Travel and Business Meals
  • Advertising and Marketing

Oftentimes, small business owners overlook deductions simply because they are unaware of the various expenses that can be claimed. Some of these expenses are:

  • Home Office Deduction: If you have a dedicated space in your home used solely for business purposes, you may be eligible for a home office deduction.
  • Startup Costs: Many startup expenses, such as market research, advertising, and employee training, may be eligible for deduction in the first year of business.
  • Software and Technology: Expenses related to software subscriptions, computer equipment, and tech services used for your business can often be deducted.
  • Education and Professional Development: Costs associated with improving your skills or staying updated in your field of expertise may be deductible.
  • Business Insurance: Premiums paid for business insurance, such as liability insurance or property insurance, are usually deductible.

While maximizing deductions is necessary to reduce your tax burden, you must do so within legal boundaries. Attempting to claim deductions not legitimately related to your business or engaging in aggressive tax strategies can lead to audits and severe penalties.

Take Advantage of Small Business Tax Credits

Tax credits are a valuable tool for reducing your tax liability dollar-for-dollar, making them a powerful way for small business owners to save money. Researching and understanding the tax credits that apply to your business can lead to significant savings during tax season. Tax credits vary depending on your business’s industry, size, and activities, so stay informed about the credits relevant to your specific situation.

You can begin by exploring the IRS website and other reputable sources for information on federal tax credits. Common small business tax credits include the Work Opportunity Tax Credit (WOTC) for hiring individuals from targeted groups, the Small Business Health Care Tax Credit for contributing to employee health coverage, and the Research and Development Tax Credit for investing in research activities.

Various tax credits are available to small business owners to promote innovation, energy efficiency, workforce development, and more. Some common examples include:

  • Work Opportunity Tax Credit (WOTC): This credit is available to businesses that hire individuals from certain target groups, such as veterans, ex-felons, and long-term unemployed individuals. Depending on the category, the credit can range from $1,200 to $9,600 per qualified employee.
  • Small Business Health Care Tax Credit: Small businesses that provide health insurance to their employees may qualify for this credit, covering up to 50% of the premiums’ cost. To be eligible, the business must have fewer than 25 full-time equivalent employees with average annual wages below a certain threshold.
  • Research and Development (R&D) Tax Credit: This credit encourages businesses to invest in research and innovation. It provides a percentage-based credit for qualified research expenses, including wages, supplies, and contract research costs.

To ensure you take full advantage of the credits available to your small business and comply with all requirements, consult a tax professional. They can also advise you on any changes to the tax code that may impact your eligibility for certain credits.

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Stay Informed about Tax Deadlines and Compliance

Missing tax filing deadlines can lead to penalties, interest, and unnecessary stress. Some key tax deadlines for small business owners include:

  • Income Tax Filings: The deadline for filing federal income tax returns for some LLCs is April 15th. However, if your business operates as a partnership or S corporation, the deadline might be March 15th.
  • Estimated Tax Payments: Small business owners who expect to owe $1,000 or more in taxes throughout the year are typically required to pay quarterly estimated tax payments. These payments are due on specific dates throughout the year, usually in April, June, September, and January of the following year.
  • Payroll Tax Filings: If you have employees, you must withhold payroll taxes and file regular payroll tax reports. The frequency of these filings depends on the size of your payroll and your state’s requirements.

Small businesses have specific tax forms and reporting requirements based on their legal structure and activities. Familiarize yourself with the forms you need to submit and the information you must report:

  • Form 1040 Schedule C: This form is used by sole proprietors and single-member LLCs to report business income and deductions.
  • Form 1065: Partnerships must file this form to report business income, deductions, and each partner’s share of profits and losses.
  • Form 1120 or 1120S: C corporations and S corporations respectively use these forms to report their income, deductions, and tax liabilities.
  • Form 941: Employers must file this form quarterly to report income taxes withheld from employees’ wages and the employer’s portion of payroll taxes.
  • Form 1099-MISC and 1099-NEC: If you hire independent contractors and pay them more than a certain amount during the tax year, you must issue these forms to report their earnings.

Consider Hiring a Tax Advisor

For small business owners, the concept of estimated taxes is critical to staying compliant with the tax system. Unlike employees who have taxes withheld from their paychecks, business owners are typically responsible for paying their taxes directly to the IRS every quarter. These payments are known as estimated taxes and are based on the business’s expected annual income, deductions, and tax liability.

Business owners must first estimate their annual income and deductions to calculate quarterly estimated taxes. This can be challenging, especially for businesses with fluctuating incomes or significant changes throughout the year. An experienced tax advisor can help you make accurate estimations based on your business’s historical data and industry trends.

A tax advisor can also explore tax-saving strategies that may be available to your business. They can identify deductions, credits, and incentives that align with your operations, ultimately reducing your tax liability and increasing your bottom line.

Bonus Tip: Leverage Retirement and Health Savings Accounts

Retirement plans not only secure your financial future but also offer significant tax advantages. By contributing to retirement accounts, you can reduce your taxable income, defer taxes on earnings, and potentially benefit from employer contributions. 

Here are some retirement plans commonly used by small business owners:

  • Individual Retirement Accounts (IRAs): Both traditional and Roth IRAs are available to self-employed individuals and small business owners. Contributions to traditional IRAs are tax-deductible, reducing your current taxable income, while Roth IRA contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.
  • Simplified Employee Pension (SEP) IRA: SEP IRAs are ideal for small business owners with few or no employees. Contributions are tax-deductible, and the plan is easy to set up and administer.
  • Solo 401(k): Also known as a one-participant 401(k) or individual 401(k), this plan is suitable for self-employed individuals with no employees other than a spouse. It allows for higher contribution limits than IRAs and offers a combination of salary deferral and profit-sharing contributions.

For small business owners with high-deductible health insurance plans, Health Savings Accounts (HSAs) offer excellent opportunities for tax savings. HSAs are tax-advantaged accounts that allow you to set aside pre-tax dollars to cover qualified medical expenses for yourself, your spouse, and your dependents. Your contributions to an HSA are tax-deductible, reducing your annual taxable income.

Wrapping Up

These tax tips for small businesses can make navigating tax season more manageable. Organizing and maintaining accurate records, understanding deductible expenses, and taking advantage of small business tax credits are key to optimizing your tax savings. Staying informed about tax deadlines and compliance also ensures you avoid penalties and stay on track. 

Moreover, working with a tax advisor at NCH can provide expert guidance, while leveraging retirement and health savings accounts can offer long-term tax advantages. Call 1-800-508-1729 and start managing your liability during tax season!

Have questions? Call our business formation experts at 1-800-508-1729 for a FREE consultation and get started!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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